The flood insurance dilemma: Why you could face paying extra so that all UK homes are covered

Plans put forward by the environment secretary Caroline Spelman on Tuesday could mean home insurance premiums will have to rise for many to cover the cost of flooding across the UK.

The plans are still to be finalised but could mean all insurers have to subsidise the cover of homes in at-risk areas via a levy so that insurance is available on reasonable terms to all homes.

They build on a temporary arrangement between government and insurers that already requires cover be made to all households, on the condition that the Government invest in flood defences. That agreement is due to expire next year and does not bind new insurers that are able to cherry-pick the homes they insure - avoiding flood risk areas where claims are more likely.

The Department for Environment, Food and Rural Affairs insists that premiums will not have to rise as a result of the new plans. However, widening the subsidy will mean some insurers will have to raise prices if they want to maintain margins.

What is the current voluntary agreement?

Flood cover is provided under the voluntary ‘Statement of Principles’ first signed by insurers in 2000, after extensive flooding in that year caused over £1billion worth of damage.

Under this, insurers agreed to continue to provide flood insurance to as many homes as possible, provided the Government continued to invest in flood defences to protect communities. The agreement specified that defences should be able to cope with a one-in-75 years level flood.

Properties built since January 2009 are already exempt from the deal and while older homes are covered by the agreement which forces insurers to provide cover, there is no limit what insurance can cost or what excess applies.

Already some customers are finding they are being quoted huge flood excesses of as much as £10,000 and extremely costly premiums.

Insurers fear that the effects of climate change will make extreme weather more common and they are reluctant to carry on offering to cover future flood damage. In response to the most recent bout of flooding, experts have claimed the proliferation of garden decking and patios has made flooding more likely.

The Association of British Insurers says the agreement was always intended to be nothing more than ‘a sticking plaster’ and is negotiating with the Government over what happens from June 2013.

It says that the agreement as it exists today allows insurers to cherry pick customers in low-risk areas, and forces customers in higher risk areas to stay with the same insurer instead of being able to shop around for better deals.

The new proposals

According to the Department for Environment, Food and Rural Affairs, insurers already ‘raise a small sum from policy holders to cover the cost of insuring homes at high risk of flooding’.

In a statement, the Environment Secretary insisted that the proposal is simply formalising an arrangement which already exists within the insurance industry.

She said; ‘We are now considering a cross-subsidy mechanism that would ensure high risk households can get affordable insurance without extra costs being placed on policy holders or taxpayers.’

The move has been criticised by the shadow environment secretary Mary Creagh MP who said: ‘The Tory-led Government has cut flood defence investment by 30 per cent and are failing to ensure that flood insurance remains available to all. The recent floods are a big wake up call to the Government to act now.’

The plans have not yet been finalised, and if an agreement cannot be reached by the middle of next year, some homeowners face being left without insurance.

Barry Smith, of insurer Ageas UK said: ‘It is a welcome step that the Government announced today that it is moving with the industry towards a levy type solution for customers in high risk flood areas.

'But more work needs to be done during the summer recess to maintain momentum and give us confidence that a long term solution can be found, particularly agreement on the role the insurance industry and Government will play.’